The government’s attempts to recover an additional tax of around Rs57 billion from Ncell may face obstruction with an international tribunal indicating that Nepal should refrain from recovering more taxes from the 2016 Ncell buyout by Malaysian firm Axiata.

On June 9, the International Centre for Settlement of Investment Disputes (ICSID), an international investment dispute resolution body established by the World Bank, issued a verdict in favour of Nepal government in the dispute over the determination of capital gains tax (CGT) levied on Ncell regarding its acquisition by Axiata.

Officials said the win saved the government from paying as much as Rs66 billion to Ncell and Axiata Investment (UK) that they had claimed in compensation from the Nepal government for losses caused to Ncell along with annual interest of 16 percent and arbitration expenses.

In the same verdict, the tribunal also indicated that Nepal should refrain from demanding any further tax, fees, penalties, or interests

in relation to the transaction, the Ncell said in a press statement on Monday.

“The Tribunal observed specifically that a further tax assessment could violate the Income Tax Act and qualify as a breach of the bilateral investment treaty between Nepal and the United Kingdom,” Ncell said in further clarification to the Post.

Government officials also admitted that the ICSID has indicated as much in the verdict, preventing the government from recovering corporate income tax that arised from TeliaSonera’s sale of Ncell to Axiata.

Phanindra Gautam, chief of International Law and Treaty Agreement Division at the Ministry of Law, Justice and Parliamentary Affairs, told the Post that ICSID has not clearly told the Nepal government to refrain from recovering the additional tax arising from the Ncell buyout in 2016. “But there is sufficient indication that the tribunal expects Nepal not to levy any further tax on the matter against the claimant [petitioner].”

According to him, the tribunal has also used the word ‘it is confident’ about Nepal refraining from extracting more taxes in this case. “We understand it as an indication of the tribunal that Nepal should not tax Ncell further,” Gautam added.

In fact, Ncell has already paid the capital gains tax (CGT) as determined by the Supreme Court even when the case was being heard by the tribunal. In November 2019, the court determined the CGT liability of Ncell at Rs21.1 billion which it paid in installments. Earlier, the telecom giant had paid as much as Rs23.57 billion.

Even though the CGT was supposed to be paid by Swedish multinational TeliaSonera, which sold its stake in Ncell, the Nepal-based company—Ncell— had to pay TeliaSonera's liability as the seller exited from Nepal without paying the applicable CGT.

Even after Ncell paid the CGT, the Large Taxpayers’ Office determined additional tax liability of around Rs57 billion as per section 57 of the Income Tax Act-2002.

Section 57 says if the ownership of any entity changes by 50 percent or more as compared to its ownership until before the last three years, the entity shall be deemed to have disposed of the property under its ownership or the liability borne by it.

“As per Section 57 of the law, the entity whose ownership was changed by 50 percent or more is required to pay income tax for deemed disposal of property,” said Dirgha Raj Mainali, director general of the Inland Revenue Department.

Based on this legal provision, the Large Taxpayers’ Office in early 2021 had determined corporate income tax liability of around Rs57 billion including original tax liability, interest and fines for the company’s failure to pay applicable taxes on time. Then, in early 2021, Ncell knocked the door of the Supreme Court against the tax authority’s determination of additional tax liability.

Subsequently, the Supreme Court issued an interim order against the tax authority, pointing out the risk of double taxation on a single entity over the Ncell buyout.

“The ICSID judgment also suggests that further taxing Ncell would be against international tax principles and the spirit of Nepal’s own income tax law,” said Gautam. “If Nepal does levy further taxes, Ncell may have the right to seek remedy based on the ICSID verdict.”

Despite ICSID tribunal’s indication against imposing further tax liability on Ncell, it has not said so in clear words, according to officials and experts. Likewise, the case over the same issue has been pending at the Supreme Court. “As the case remains sub judice, it is better to let the court interpret the law,” said Semanta Dahal, a corporate lawyer.

Besides indicating not to levy further tax liability on Ncell, the ICSID tribunal has also told Nepal government to pay approximately $1.4 million to Axiata owing to Nepal’s non-adherence to the orders issued by the ICSID tribunal’s during the early stage of process, according to Ncell’s press statement.

The government had determined the tax liability of Ncell by disregarding the ICSID’s provisional order of December 2019 that barred the government from enforcing the demand letter served by the Large Taxpayers’s Office (demanding that Ncell pay Rs22.44 billion in allegedly outstanding CGT including interest and penalty).

The government had contended before the ICSID tribunal that the latter does not have primacy over the final verdict issued by Nepal's Supreme Court. “But the ICSID tribunal determined that it has jurisdiction over the issue even if Nepal’s Supreme Court has already issued its final verdict,” said Bipin Adhikari, one of the lawyers advising the government on dispute settlement at the ICSID.

Ncell in a press statement said that the ICSID also ordered the Nepal government to reimburse it for the cost of a loan it took out. “The sums to be paid encompass interest on the loan management fee,” the Ncell said in an emailed response to the Post.

According to Gautam, Ncell had taken loans to pay the tax as determined by the tax authority by violating the provisional order issued by the ICSID tribunal.

“The tribunal ordered us [the government] to pay equivalent of interest that Ncell had to pay in tax,” he said. Besides these two expenses to be paid to Ncell and Axiata, Nepal has to spend additional amounts in legal fees. “Combining all these expenses, the government is expected to spend around Rs1 billion,” said Gautam.

But more importantly, the June 9 verdict of the tribunal dismissed Axiata’s claims that Ncell was denied justice and it was not treated fairly and equitably and, moreover, tax laws were used discriminately, officials and experts said. By making such claims, Axiata and Ncell had demanded payment of as much as $420 million (Rs55.54 billion) claiming damages.

“Had we lost the case, the Nepal government would have had to pay as much as $500 million or around Rs66 billion including interest and arbitration expenses,” said Gautam. “With this verdict, the government has been saved from huge monetary losses, but the narrative of Nepal not being a good place for foreign investment has also been dismissed.